Final answer:
The true statement about the multiplier is C) The larger the MPC, the larger the multiplier. The multiplier effect indicates that as the MPC increases, so does the multiplier, amplifying the initial change in spending throughout the economy.
Step-by-step explanation:
The relationship between the Marginal Propensity to Consume (MPC) and the multiplier is: C) The larger the MPC, the larger the multiplier. The multiplier effect in economics describes how an initial change in spending leads to a larger change in overall economic activity. It is closely tied to the MPC, which measures the proportion of additional income that a consumer will spend on consumption rather than saving. As the MPC increases, consumers spend a higher portion of their additional income, which in turn generates more income for others, leading to further spending.
This cycle amplifies the initial increase in spending throughout the economy, resulting in a larger multiplier. For example, with an MPC of 80%, $0.80 of every dollar received is spent, and the recipient of that $0.80 will spend 80% of it, continuing the cycle. The formula to calculate the multiplier is 1 / (1 - MPC) when ignoring taxes and imports, indicating a direct relationship between the MPC and the size of the multiplier. Therefore, a higher MPC leads to a higher multiplier, showing the expansive effect of consumption on economic activity.